A list of current countries doesn't solve the problem. Let's take for
example Freeciv, which was cited earlier as having flags as a core
part of the experience (I'd disagree, but anyways).

The problem with FreeCiv is that the only distinction between a city or
unit of one nation and one of another is the flag[1], so there doesn't
seem to be any simple way to remove them. They could be replaced with
different flags graphics, but they'd all have to be distinct; you
couldn't just use (e.g.) the Fedora logo for every nation.
There's also the fact that FreeCiv in particular contains Tibet as a
playable nation; even if the flag were removed, I don't think refering
to the Tibetan nation would pass muster in China. That being the case
we're either going to need to go a lot further than removing just flags,
or accept that generic Fedora won't be 'China safe', in which case we
might as well leave the flags alone.
Ewan
[1] e.g:<http://freeciv.wikia.com/wiki/File:Big_window.png

That's a pretty big reason why games such as FreeCiv should stick to
fictional countries and fictional flags. It avoids all of these issues.

Using real countries does add value to freeciv (I'm not the only one
that clicks a country and reads about all the great leaders from there,
right? Right? Anyone? Bueller? ;-)

It's also unavoidable in other games that are meant to be simulations as
opposed to equally weighted wargames.